Equity experts polled in the run up to naira devaluation, which appears more likely, going by the policy shift to a more flexible foreign exchange stance in Africa’s largest economy, fingered some financial, industrial and consumer stocks as most preferred for local and foreign investors, post devaluation.
Nigerian stocks were higher after the close on Friday, as gains in the Insurance, Oil & Gas and Food, Beverages & Tobacco sectors led shares higher. At the close in Lagos, the Nigerian Stock Exchange added 0.08% to hit a new 6-month high.
Experts say the blinding bright sparks given out by some stocks may be far from flickering out, once the naira weakens, as they fingered the most attractive ones of them.
“A wide rally that will cut across all the sectors can be anticipated after currency devaluation. For financial stocks, tier one banks like GTB and Zenith are attractive, while Access and Diamond banks make for good tier two investments,” Abiodun Keripe, head of research & strategy at Elixir Investment Partners Limited said by phone.
“Oando will definitely enjoy some interest due to the under-pricing it has suffered owing to the economic headwinds. Total, Mobil and Forte-oil are also good, while upstream Seplat remains attractive.”
Financial stocks had led the gains last week, with the banking index up 5.9 percent, erasing losses for the year and bringing it to the highest since Nov. 23.
“We’ve been positioned in Nigeria ahead of devaluation, reflecting our view that asset prices were significantly depressed even more than a potential devaluation,” said Nick Ndiritu, co-manager of South African equity Fund, Allan Gray.
“Banks are quite attractive based on equity valuation and even with devaluation, they’d still be attractively priced.”
Cement stocks haven’t fared badly either when compared to bank stocks. Trade volumes reached a record high in April, despite a price increase in March.
“Dangote cement will be a good buy owing to its expansion plans and the construction activities to ensue through the year on the back of government’s capital expenditure,” said Ayodeji Ebo, head of investment research, Afrinvest in an interview with BusinessDay.
“For consumer products, Nestle will also attract interest because it has been consistent in profitability despite the challenging terrain.”
Still on consumer products, Ebo said the Nigerian Breweries was also attractive though it recorded a profit decline in 1Q16. He anticipates a pickup, as policy makers move to address strained disposable income in 180 million Nigeria.
In the same vein, some experts said the financial sector is ridden with risks and may be unattractive given the surge in Non-performing loans (NPL).
“The recent increase in NPLs is just the beginning of a trend we’ll probably see accelerate later this year and in 2017,” said Christine Phillpotts, an equity analyst at Alliance Bernstein.
With a lot of stocks trading at multi-year or almost 10-year lows in term of their valuation on the Nigerian Stock Exchange (NSE), the average price of earnings ratio of Nigeria’s banks today is not reflective of their earnings power.
“Consumer stocks are lower than they use to be, but they are not dirt cheap when you compare them to other emerging or frontier market,” said Ayodele Salami, chief investment officer, Duet Asset Management.
“Banks that investors would find attractive post-devaluation would probably be UBA and Zenith, among the second tier probably Ecobank, FCMB Diamond Bank.”
Oil stocks entered a bullish market as investors bought equities on the back of a fuel price modulation and liberalization of the downstream sector for efficient distribution and allocation of petroleum resources.
“The low hanging fruit in private investment is the oil services sector and petrol storage,” said Aubrey Hruby, co-Founder of advisory group, The Africa Expert Network.
The share price of Mobil Nigeria Plc jumped 12.90 percent to N175 as at 2:30 pm on the floor of the exchange. Conoil Plc’s stock price was up 27.70 percent to N23, Total Plc jumped 12.70 percent to N169 while Forte Oil increased by 0.94 percent to N212 on the same day. The average share price increase of these firms was 36.69 percent, based on data gathered by BusinessDay.
The Nigerian Stock Exchange (NSE) Oil & Gas Index rose by 10% in just three trading days following the announcement. This mainly comprise downstream players, which account for 72.5% of the index by market cap., according to Temilade Aduroja, oil and gas analyst with Renaissance Capital, an investment banking firm, in an emailed note to BusinessDay.
“We think the effect of deregulation will be a net positive for the major marketers, who in recent years have seen significant amounts of cash flow tied up with the government in the form of the petrol subsidy,” said Aduroja.
